Journal of Financial and Quantitative Analysis Vol. 54 No. 6 2019

Volatility-of-Volatility Risk

Darien Huang^1,2; Christian Schlag^1,2; Ivan Shaliastovich^1,2; Julian Thimme

¹ California University of Pennsylvania · ² University of Pennsylvania

Abstract

We show that market volatility of volatility is a significant risk factor that affects index and volatility index option returns, beyond volatility itself. The volatility and volatility of volatility indices, identified model-free as the VIX and VVIX, respectively, are only weakly related to each other. Delta-hedged index and VIX option returns are negative on average and are more negative for strategies that are more exposed to volatility and volatility-of-volatility risks. Further, volatility and volatility of volatility significantly negatively predict future delta-hedged option payoffs. The evidence suggests that volatility and volatility-of-volatility risks are jointly priced and have negative market prices of risk.

DOI

10.1017/s0022109018001436

Volume

54

Issue

6

Pages

2423-2452

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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